Lease abstraction is the process of summarizing key, high-level information of a lease. A lease abstract gives you exactly what you need for due diligence, in a concise format. But abstraction of leases is more like an art. It requires skill and patience. The main challenge arises when a landlord or tenant has a huge portfolio of leases and they don’t have a solid process to abstract leases effectively. Moreover, FASB ASC 842 requires abstraction of as many as 55 data points from leases to meet their compliance requirements. And without an abstract, it will be tedious and time-consuming to analyze all the key clauses for each lease.
Here are 5 lease abstraction best practices to bear in mind:
- Inventory of lease documents – Leases could be spread across various locations, hence the first step would be to create an inventory of all the leases and additional documents like amendments, letters, estoppel certificates, etc. Scan the leases and their additional documents and organize them in a centralized repository for easy access. At this stage, you may want to document the details of missing leases or accompanying documents for future abstraction.
- Template – Whether you’re abstracting your leases for the first time or updating your existing template, take into consideration all additional financial and non-financial information that needs to be abstracted to comply with ASC 842. This is a critical step, so involve stakeholders who are part of the FASB compliance to finalize the key data that needs to be abstracted and avoid re-abstraction of leases.
- Validation – Having an effective validation process in place is essential. Involve experienced staff to implement quality control measures to make sure the abstraction is accurate. Pay close attention to machinery and equipment leases, dates and dollar amounts that need to be accounted for under the FASB ASC 842 compliance requirements.
- Bookmarking & tagging – Bookmark and tag the corresponding section in the original lease so that you can refer back to them whenever required instead of flipping through the entire lease. This is best done when the abstraction process is underway.
- Software – Invest in a lease accounting/administration system where you can enter and track the abstracted lease information. The system should comply with ASC 842 and should be able to give instant access to the information required in order to fulfill your obligations under a lease and give timely notification of critical dates.